Money for Vineyards, where is it?
No question, the United States economy is in decline and has been for quite some time. However, while the economy may be suffering, money is still accessible for the viticulture industry. It may be harder for Americans to borrow money for commercial and residential purposes, but agricultural lending remains strong and interest rates are near historic lows. The recent economic crisis has dramatically weakened many sectors of the American economy. One sector that continues to show strength is agriculture. This applies to both general and viticulture agriculture. With a high demand for many types of commodities, including grapes, vineyard real estate prices show increasing performance. Most areas produce strong appreciation year after year. Given this remarkable strength and perseverance, some financial institutions will make it a point to lend money for farm, ranch and vineyard purposes.
Subprime mortgages are largely to blame for the lending crisis as well as the overall economic crisis. Financial institutions that invested in these dangerous loans have suffered heavy losses, losses that have depleted the capital available to loan to ordinary Americans. Many of the banks that risked money in subprime loans have been purchased by larger companies or, even worse, filed for bankruptcy protection.
For those of you unfamiliar with subprime mortgages, they are generally residential real estate loans made to a borrower with a weaker credit profile than that of a prime borrower. Although there is no standardized definition, in the United States, subprime loans are usually classified as those where the borrower has a credit score below a certain level. Typically these borrowers have a score below 660. Subprime borrowers have a higher likelihood of than prime borrowers do because of this weaker profile. Subprime mortgages were securitized and sold on the secondary market to investors like Lehman Brothers, Bear Stearns, Washington Mutual and IndyMac Bank, to name a few. The difficulties of many of these large-scale banks and financial institutions are well known, but now even smaller community banks across the country are feeling the economic pinch. These banks include Superior Bank of Hinsdale, Illinois, Main Street Bank of Northville, Michigan and Mutual Bank of Park City, Utah.
In wake of the market turmoil many banks rewrote underwriting guidelines and, in some cases, froze lending capital until America’s markets stabilize. Farmer Mac, on the other hand, is making positive, proactive moves during this recession. Charted in 1988, Farmer Mac (Federal Agricultural Mortgage Corporation) was created to provide relief to agriculturalists in a time of double-digit interest rates. This government chartered program guarantees the loan portion a financial institution would otherwise assume all the risk of. A loan Institution that utilizes Farmer Mac’s guarantee program will have the ability to offer low interest rates and fixed terms to their agricultural customers, including vintners. This enables the agriculturalist to cut loan costs and increase the bottom line, ultimately ensuring that many agriculturalists will not see the effects of the “credit freeze.” Because of the financial strength and stability of Farmer Mac and the program’s persistence in product development, many financial institutions whose lending practices focused on farm, ranch and vineyard operations have been fortunate enough to survive a tidal wave of bank closures and losses. One can only speculate what the future will hold, but many economists believe the viticulture community will continue its path of perseverance.
Several different ratios are used in determining the eligibility of a loan for a vineyard through Farmer Mac. One Farmer Mac program in particular allows for a very lenient 1.00-1 debt-service-coverage-ratio. A debt-service-coverage-ratio, (DSCR), is a calculation used to determine whether income from the borrower can service the debt. To calculate debt service coverage, divide the net income by total debt for the subject property. A DSCR greater than 1 indicates a positive cash flow, and a DSCR less than 1 indicates negative cash flow. The average debt-service-coverage ratio accepted amongst many agricultural lending institutions is 1.25-1 and in this market environment you’ll see some lenders restrain their customers with debt-service-coverage ratios of 1.45-1. In most cases it’s the debt-service-coverage ratio that disqualifies borrowers from being approved. Another commonly used ratio is the loan-to-value ratio. Farmer Mac allows for a maximum of 70 percent and a maximum of 100 percent combined-loan-to-value-ratio.
It may be hard to believe, but, yes, it is possible to obtain 100 percent financing for a permanent planting operation, such as a vineyard, as long as the property’s income can support its debts. This can easily be calculated with the debt-service-coverage ratio. Often lending institutions will only allow for a maximum of 50 percent loan-to-value ratio for permanent planting operations and it’s extremely rare to see a lender allow for 100 percent combined-loan-to-value ratios. The minimum credit score for a Farmer Mac program is 660 compared to many other lending institutions with minimum scores as high as 700. You can now see how large the variances can be in underwriting criteria from lender to lender. Your lender can play a significant role in your operations success.
Farmer Mac recently announced a record loan guarantee portfolio of $9.8 billion dollars. In addition, Farmer Mac officials quoted a historically low default .11 percent. Farmer Mac is known for offering innovative loan programs to benefit vintners and agriculturalists, alike. With continued growth, record loan volume, solid leadership and record low default rates you can rest assured Farmer Mac will be here today, and tomorrow, to help financial institutions provide outstanding loan products to their customers, the viticulturists and agriculturalists.
How to get a Farmer Mac loan
Farmer Mac loans are secured by agricultural real estate. Viticulturists can obtain one of these loans by requesting a loan through a Farmer Mac lender. You may use a Farmer Mac loan for refinance purposes, expansions, or to purchase agricultural property. For more information contact Farm Plus Financial at 866-929-5585.
Written by: Josh Mitchey, Business Development Manager, Farm Plus Financial.
Edited by: Justin Ellison, Dept. of History, University of Indiana